August 31, 2006

Recently, I have noticed a developing trend of people starting companies and rushing to raise venture capital. I've had more people come to me in the past 6 months seeking advice on raising venture capital than I have had in the past 6 years.

It sound like another Internet landgrab doesn't it? Web 2.0. Dot-com mania 2.0. Yet, this time around, Frank points out that venture capital is no longer a required ingredient for starting a company. After all, why raise capital when open source software, Linux hardware, and hosting all be had for a fraction of what it cost just a few years ago. The VC is no longer needed in early stage.

The best advice he gives to entrepreneurs is to build a business, and get the VCs in when there is momentum, because "Momentum sells. Period. Why?" It's simple.

1) As Frank points out, venture capitalists provide capital.Few venture capitalists today are operators. Your typical venture capitalist today might have worked a few years at a company, gone to McKinsey, gotten an MBA, and gone the VC route. Alternatively, your typical VC might have started out in banking, worked on a few deals, and been picked from a perenially abundant crop of bankers. Few VCs have started a company, lived on "roots and berries" and Ramen noodles, and racked up so much credit card debt that the monthly interest is equal to his or her net worth.

2) Venture capital is becoming institutionalized. Thirty years ago, your typical VC was your neighbor in Palo Alto who happened to get lucky sprinkling investments deals in companies started by a next door neighbor. Today, VCs are managing not tens of millions but in some cases billions. There simply isn't that much 1) time to work with companies 2) time to find deals 3) eat and sleep.

3) VCs like to say "We provide Value Add." I say most VCs today provide "Value Subtract." Many VCs sit on 5-10 boards. That's 5-10 board meetings every 90 days (or 64 working days). That means he is spending up to 15.625% of his time sitting in meetings - not to mention the time sitting in the car, the airplane, or his desk (finding the next deal).

With so many responsibilities, it's obvious why, for the entrepreneur today, there's no rush to raise venture capital. All you need are the 3 As - Ajax, Apache, a dose of Arrogance!